Wednesday, November 16, 2011

Larry Summers and Inequality

Felix Salmon wrote a very thoughtful account of the Larry Summers/Paul Krugman debate that occurred in Toronto on earlier this week. The account made me wonder, for the thousandth time, about Larry Summers – genius or cretin?

Here’s the passage that made me press my vote for the latter:

Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.” This might have been received better had Summers not earlier praised America, while pointing to Bremmer, as “the only country in the world where you can raise your first $100 million before you buy your first suit and tie”.
Bremmer is undoubtedly a rich and successful entrepreneur — and one who never wears a tie, to boot — but he’s making money entirely from the 0.1%, and at heart Eurasia Group’s business model is one which does better as the ultra-rich get richer. In the context of a debate about how to rescue the economy for the other 99% of us, it doesn’t much help to point to One Percenters like Jobs and Bremmer who have managed to do well for themselves in an otherwise stagnant economy.”
Salmon’s problem with Summers claim doesn’t seem, well, systematic enough, but at least it touches on the randomness of Summers’ claim. In fact, the Steve Jobs example falls squarely in the realm of pundit science, in which one uses some random example that has a sentimental hold on the audience to make a general point that is wholly lacking in other empirical support.
Summers notion that we would not have technological innovation, or at least diffusion, is really a matter that has been researched. In fact, it can be investigated in a number of ways. We can ask whether wealth inequality is really, throughout history, the only driver of innovation. We can ask if other kinds of inequality will work as well – for instance, being honored for merit. We can ask if inequality is even necessary – for instance, does a kind of non-monetary, non-honorific ideal also work to induce technological breakthrough. And we can ask, more narrowly, whether there is a metric by which we can measure business innovation and compare periods when there was less wealth inequality and periods when there were more as to groundbreaking technological breakthroughs.
If we want to have a coarse measure of the technology/inequality relation, we could look to eras where inequality was lessening and eras were it was increasing in the 20th century and ask if the eras of inequality increase correspond to technology breakthroughs. I think Summers would be disappointed: the major technology breakthroughs of the twentieth century, in chemicals, communication, medicine, computing, and agriculture all cluster in the 30s to 70s period. Well, to be fair, not all – transportation and radio were certainly transformed in the high inequality twenties. But the roots of the technologies in play were certainly due to state intervention and progressive programs in the 10s – the American car industry, for instance, was birthed by an almost prohibitive tariff congress let fall on foreign automobiles.
What you do find in the high inequality periods is a more intense diffusion of innovation. This, it must be said, seems to have come to an end, in America, in the 2000s, which was a dead zone in terms of major innovation. Whether a lesser inequality would have impeded the diffusion of technological products is an interesting question. Certainly, to an extent, the chance for profit – and hence, for some inequality – has helped inject innovations into the mainstream of so
Penicillin – its discovery, diffusion and patenting – is a classic case of the question of money vs. the social ideal. As is well known, neither Fleming, who discovered penicillin, nor Ernest Chain or Howard Florey, the Oxford chemists who re-discovered Fleming’s work in 1940, wanted to patent the drug. They couldn’t even see that it was the kind of thing that was patentable. The myth is that when penicillin was taken to America, Americans had a much different sentiment, and stole penicillin from the British. In a paper surveying this history, however, Robert Bud (2008) shows that the Americans were very hesitant about allowing private companies to patent materials or processes for which public research money had been granted.
“In the USA, similarly, the benefits of publicly-funded research were reviewed. A three
volume study of federal regulations was published in 1946 with a view to standardizing the
diverse regulations which had emerged across the public sector.56 Some agencies allowed exclusive
licenses to private contractors – essentially assigning them the patents, others permitted only
non-exclusive licenses. The report came down firmly on the side of the latter. Research funded
from federal funds was kept in the public domain. It was not as if the turbulent wartime years had
never been. The number of university owned patents increased from a handful during the 1930s
to about a 100 in 1950, but they did not keep multiplying, and did not exceed 150 until the end of
the 1960s.57 Penicillin development had disrupted the old world, rather than leading directly to
the new.
Even US pharmaceutical companies experienced the fruits of ambivalence about patenting.
In the 1950s the price of penicillin collapsed as new entrants piled into the industry, whose product
had not been patented. However there was a determination that the newer antibiotics, such as
the tetracyclines, should be much more closely controlled by US patents and their price was kept
from collapse. During the late 1950s the patent and profit mindedness of the industry was challenged
by both the Federal Trade Commission and the Senate as prewar concerns were brought
to bear on the newly booming pharmaceutical industry. Campaigners who in the 1930s had seen
patenting as a cause of the Great Depression continued their struggles through the 1950s, particularly
deploying Senate support.58 Gradually, however, the emphasis moved from a concern with
patents to anxieties about safety. Although the outcome would be the strengthening of the Food
and Drug Administration as the guardian of the public interest, the right to patent was untouched.”

This story, rather than some random reference to St. Steven Jobs, has much more relevance to the question of the benefits of inequality. And it completely fails to validate Summers idea that if a man can’t be a billionaire, well technology will grind to a halt and our skyscrapers will fall.
Like so much of what Summers utters, his argument is bogus from the get go. But he continues to wow the rubes, including the ones at 1200 Pennsylvania Ave.

About Me

MANY YEARS LATER as he faced the firing squad, Roger Gathman was to remember that distant afternoon when his father took him to discover
ice. Or rather, to discover the profit making potential of selling bags of ice to picnicking Atlantans, the most glorious of the old man's Get Rich schemes, the one that devoured the most energy, the one that seemed so rational for a time, the one that, like all the others - the farm, the housebuilding business, the plastic sign business, chimney cleaning, well drilling, candy machine renting - was drawn by an inexorable black hole that opened up between skill and lack of business sense, imagination and macro-economics, to blow a huge hole in the family savings account. But before discovering the ice machine at 12, Roger had discovered many other things - for instance, he had a distinct memory of learning how to tie his shoes. It was in the big colonial, a house in the Syracuse metro area that had been built to sell and that stubbornly wouldn't - hence, the family had moved into it. He remembered bending over the shoes, he remembered that clumsy feeling in his hands - clumsiness, for the first time, had a habitation, it was made up of this obscure machine, the shoe, and it presaged a lifetime of struggle with machine after machine.